Book review: David Einhorn’s “Fooling Some of the People All of the Time: A Long Short Story”

Nevermind that I haven’t read the book I’m about to review — this post is about white-shoe whistleblowers.

[Swivelchair note 05.16.08: Possibly the book and media blitz are to promote the stock for NASDAQ: GLRE, Greenlight Re, a stock domiciled in the Caymans, in the business of "customized reinsurance solutions." Hmm. Any time an insurance stock is sold, imo, what you are buying is the investment of the premiums, and that makes me suspicious. So take what's said here with a grain of salt, or Cayman's beach sand, whatever. Ironic that I made the remarks below about Berkshire Hathaway, before I realized that the man who wrote this book is the president of a reinsurance company, too.]

David Einhorn, the noted hedge fund manager, wrote about his experiences being a whistleblower against, basically, the entire financial machinery in the Western world. It was an accident, he insists. Regardless, after 6 years (plus or minus), being stalked by corrupt companies as well as the regulators who are supposed to reign in financial corruption, he wrote a book, put it all on a web site, and is giving TV interviews that turned into viral videos.

Ms. Shinyung Oh, the Paul Hastings lawyer (see previous post here), was also a whistleblower against a similarly sacred institution: Big Law. She too went to the public — except now, being a whistleblower in 2008, rather than 2002 like Mr. Einhorn, she immediately went blogosphere. (Mr. Einhorn had that 5-6 year delay).

Here’s the trend: empowerment of the elite individual against our white shoe institutions by social networking with other similarly situated elite individuals. As demonstrated by Mr. Einhorn and Ms . Oh, we have a different playing field — individuals gathering public support against the whitest of the white-shoed institutions: big law and big finance.

The White Shoe Firm, by Swivelchair (all rights waived)

The white shoe crowd will have a tough time with this one. You can’t just huddle together and revoke the club membership.

So now for the book review, despite my not having read the book (and I plan to — incidentally, the profits go to charity).

Mr. Einhorn, the author of “Fooling Some of the People all of the Time”, is the president of a hedge fund, Greenlight Capital. Hedge funds, of course, take large amounts of money and invest it — both betting that the market will increase in value, as well as hedging by betting that the market will go down. (I won’t go into all the financial ins and outs here). Much like analysts talk about investment theories about why a stock should go up, a financial expert can talk about why they think a stock will go down — which is what Mr. Einhorn did — here’s his description:

In 2002, David Einhorn, the President of Greenlight Capital, gave a speech at a charity investment conference to benefit a children’s cancer hospital. He was asked to share his best investment idea, so he did. He described his reasons why Greenlight had sold short the shares of Allied Capital, a leader in the private finance industry. Greenlight bet that the stock would decline because the company’s business was in trouble and its accounting was corrupt.

Einhorn’s speech was so compelling that the next day, when the New York Stock Exchange opened for trading, Allied’s shares remained closed. So many investors wanted to sell or short the stock that the NYSE could not balance all the sell orders to open Allied’s trading in an orderly fashion. . . .

Suffice it to say, betting the market will go down is viewed with asperity in some circles — and rightly so, “short sellers” can plant false rumors about a company to drive a stock price down.

Here’s an example of that:

Of course, legitimate short positions are just as important for a free market as any other financial position. A big bet that a stock will go down may cause the company to kick out bad management and install people who know what they’re doing. And, most importantly, short sellers have a financial incentive to catch the acounting shenanigans. So, in a way, they are whistleblowers without fear of being fired (like employees).

In a 2002 public speech, Mr. Einhorn pointed to Allied Capital as a company likely to go south:

This story began when David Einhorn presented his most compelling investment idea at a charity conference for the Tomorrows Children’s Fund. The fund supports a hospital that treats kids with cancer. The charity raises money by hosting an annual investment research conference, where well-known investors share a few stock picks and pans with an audience that pays to attend the event. All proceeds go to the hospital. David was honored to speak at the 2002 conference but had never given a public speech to a large group of strangers. There were ten other speakers at the event and David spoke third to last. By the time he gave his speech about Allied Capital it was late in the afternoon. The market was closed for trading. After he detailed Allied’s problems, word spread about the speech, and the next morning the company’s stock was unable to open. David had no idea that his speech had just set off a firestorm that would take him on an unexpected journey. Here is the speech in its entirety. . .

Not surprisingly, Allied retaliated with both barrels blazing. Allied went for an all out assault on trying to dig up dirt on Mr. Einhorn. The regulators apparently harassed and subpoenaed Mr. Einhorn — rather than the corrupt corporate executives who were cooking the books at the company Mr. Einhorn pointed out.

Now, imagine people getting your phone records. (The “pretexting” also done by the HP board of directors ). How does it feel to have people looking through your garbage? Or talking to your friends? It’s easy to say, “Oh, they’re just bullies.” But to me, that behavior is so far out of the realm of normal, that I would think, these people are capable of anything. The social contract is totally broken down.

I My friend was stalked once — one day I my friend received 64 call-and-hang-ups. I My friend found my her alarm system disconnected outside at the junction box. I My friend found other electrical wires cut, and my her mail was riffled through in the mail box. (This was an ex). I My friend was a nervous wreck, checking the car breaks and jumping at every little noise. I My friend immediately got caller ID, had the security company check on the alarm system, and told everyone I she knew what was happening. That is the key: make sure everyone knows. (This friend did go to court to try to get a protective order, and it was denied for insufficient proof — it only antagonized the ex which made things worse).

I don’t want to over dramatize. Stalking is pretty extreme. But even the subtle ways of intimidation and retaliation can be effective to shut down a whistleblower. On the other hand, to steal a quote from a former General Counsel friend, “Money attracts flies.” Where you’re blowing the whistle on, say, the Catholic Church or a financial services company or a governmental regulatory authority — they’ve been known to have the “dirty tricks department.”

With social networking, intimidation tactics are broadcast in real time — and so the target, immediately surrounded by the blogging herd, is not so vulnerable. Ms. Oh and Mr. Einhorn, despite their positions of power and authority, were being isolated, and targeted. The social networks take that tactic out of the equation. Sort of like the buffalo at the Battle at Kruger.

In thinking about Mr. Einhorn and Ms. Oh they co-opted public opinion to essentially shame institutions into behaving in a civilized way. Imagine Wall Street at the beginning of the last century — I mean the 20th century, around a hundred years ago. Smaller place, and word traveled fast.

Even law firms — up to the ’70’s, because the court houses weren’t air conditioned, judges and lawyers took August off and went to the beach. People were in a physical social network.

To state the totally oh-so-obvious, social networks on the web are the same thing — small towns. Word travels fast.

The fossils that run white shoe institutions don’t get that.

PS, I totally disagree with Greenlight’s position that Microsoft is a good company to invest in.

Update 05.13.08 before coffee: Two additional articles on Mr. Einhorn within the last day or so — he’s really struck a nerve:

Portfolio.com’s David Eisenger writes about Mr. Einhorn in “Diary of a Short Seller” (Portfolio.com May 12, 2008) The article is terrific — I wish I had read it before polishing off the above rant about how people come down on whistleblowers. Unfortunately, for my own banal, caffeine-depleted mind, two items were of the most interest:

First, what Mr. Einhorn’s offices look like:

Greenlight’s New York offices reflect Einhorn’s finance-geek personality. The conference rooms are named after accounting gimmicks: The Nonrecurring Room, for example, references some companies’ practice of taking gains that have nothing to do with their ongoing business.

The “Non-recurring room”! This is great. How about the “Restating” room? Or a room with rose colored water glasses? There is clearly a home decor angle to this. I knew someone who worked at Drexel in Beverly Hills and who saw Michael Milikin’s X-shaped desk. This was the desk where the famed (notorious) junk bond trader had different projects going on at each different part of the X — and used a chair on wheels to scoot around as needed. (Perhaps this is now a relic, as people can have multiple LCD screens for the same purpose — regardless, I’d like to see it).

Two, Mr. Eisenger quotes Mr. Einhorn as saying,

. . . “Allied is, in a sense, boring,” he says. “Boring isn’t the right word. I view it as a”—he pauses—“garden-variety fraud, not extraordinary. I have dealt with some extraordinary frauds, but they didn’t make for this story.”

Awww… c’mon. What are the extraordinary frauds?

I always wondered about Berkshire Hathaway. I mean, if you have an insurance company as part of a conglomerate, then you have a bucket full of premiums to fool with — that kind of money can move markets. So you use that money to invest in the other conglomerate stocks which increase in value (and get money from external sources) . It’s creation of a closed ecosystem, with money coming in (via the insurance premium payments and outside stock investments in the companies held) and not going out (assuming risk management on the insurance end of things so they don’t pay ginormous claims). Isn’t this insider trading on a massive scale?

Corporate managers notoriously are tempted to fudge the truth about their firms. The law’s usual strategy is to threaten an army of gatekeepers – outside directors, corporate officers, accountants, lawyers – with criminal and civil penalties for not reporting fraud. The second line of defense is to encourage whistleblowers to come forward by protecting their jobs. SOX, of course, was big on both of these approaches. The only problem is that neither approach works very well. It seems that gatekeepers and employees are stubbornly nervous about blowing up their careers by squealing.

White collar fraudfeasors turn to proactive aggression. That is what freaks people out — the threat is in the air. As shown by Mr. Einhorn, even “garden variety” fraudfeasors threaten the very being of a whistleblower. There is no reciprocal threat for the fraudfeasors. Basically, it’s like the Sopranos running the show and you don’t want to make them mad.

To me, there are also garden variety forms of aggression that white collar criminals use — the smear campaign, personal harassment, pretexting, going through garbage, dirty tricks, psychological terrorism — on up. Abusers are all the same, whether a spouse or an employer or a white collar criminal – they really have very little imagination when it comes to getting even with someone they can no longer control. The question is, “does anyone care?”